Policy | Research | Media

Lebanon’s microfinance with marco problems

Access to small-business credit could lift thousands of Lebanese out of poverty

by Sami Halabi

With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.

Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.

The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.

The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.

According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.

“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.

At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.

Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.

What’s wrong with it?

The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.

The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.

At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.

“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.

Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.

“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”

This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.

“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.

Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”

Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.

“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”

Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.

“The big banks don’t believe in microcredit — we do,” said Jammal.

Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.

“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”

The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.

“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.

Such practices are not what most banks are accustomed to.

“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.

Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.

The Politics

While there may be a sound business case for microfinance in Lebanon, many of the organizations in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.

Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.

According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.

As a result, many in the industry have complained that the market is being grossly distorted.

“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.

However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.

The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.

“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.

Government support

Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.

What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.

Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.

One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’

But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.

“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.

Plan? What plan?

Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.

“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”

First published in Executive Magazine’s October 2009 issue

With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.

Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.

The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.

The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.

According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.

“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.

At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.

Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.

What’s wrong with it?

The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.

The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.

At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.

“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.

Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.

“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”

This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.

“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.

Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”

Potential microfinance market gaps in Lebanon

Microfinance supply in Lebanon, excluding commercial banks

Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.

“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”

Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.

“The big banks don’t believe in microcredit — we do,” said Jammal.

Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.

“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”

The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.

“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.

Such practices are not what most banks are accustomed to.

“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.

Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.

The Politics

While there may be a sound business case for microfinance in Lebanon, many of the organizations in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.

Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.

According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.

As a result, many in the industry have complained that the market is being grossly distorted.

“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.

However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.

The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.

“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.

Government support

Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.

What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.

Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.

One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’

But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.

“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.

Plan? What plan?

Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.

“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”